Supplying solutions in demanding times: the effects of various fiscal

measures

Rory O’FarrellNERI (Nevin Economic Research Institute)Dublininfo@NERInstitute.net

Institute of Bankers, Dublin, 31st January 2014

How has the debate changed?

• French army 1914-1940o Schooled in old tactics

• Technology had changed

o Attack until 1917

o Defend until 1940

• Again technology had changed

• Intelligent people can get it wrong, for years.

Economics, 1929 to 1970s

• Up to 1929 problems were largely to do with supplyo E.g. Theodore Roosevelt taking on the ‘Trusts’

• 1929 Wall Street Crash, deflationary spiralo New Deal not until 1933

• Demand management

• 1970s supply side shock (oil)

• France/Denmark vs UK/US

Recent debate• Economists (again) generally view everything as a

problem of supply

• Expansionary Fiscal Contraction

Recent debate• “International experience shows

clearly that cuts in spending are more effective at fixing deficits and are better for growth and jobs than tax increases.”

Some research on tax• Coenen et. Al (2012) – a review of different models

Some research on tax• ECB– recent debate triggered by IMF

Some research on tax• ECB– recent debate triggered by IMF

Research applicable to Ireland

• A lot on spending (e.g. Benetrix and Lane)o Only look at spending

• Corsetti, Meier, and Müller (2012)

• Beetsma and Giuliodori (2011)

• Ilzetzki, Mendoza, and Végh (2013)

• ESRI research on spending and taxes (2013)

Research on Ireland• Bénétrix and Lane (2009)• Galstyan and Lane (2009)• Pereira and Pinho (2011).

Effect of a €1bn consolidation

  Bergin et al. (2013) This study  

Income Tax 0.4 1.07  

Public Sector Wage Rates 0.3 1.35  

Public Sector Employment 1.2 1.38  

Social Transfers 0.4 1.06  

Investment 0.6 1.76  

Conclusion• The Irish economic problem is fundamentally a problem

of demand, not of supply.

• Up to now the focus has been on supply side solutions,

which are less effective given the current circumstances.

• Cuts Vs Taxes? – It’s a matter of what sort of society we

want, not economic efficiency

www.NERInstitute.net

References• Bénétrix, Agustin and Philip R. Lane. 2009. "The Impact of Fiscal Shocks on the Irish Economy." The

Economic and Social Review, 40(4), 407-34.

• Bénétrix, Agustín and Philip Lane. 2010. "Fiscal Shocks and the Sectoral Composition of Output."

Open Economies Review, 21(3), 335-50.

• Bergin, Adele; Thomas Conefrey; John FitzGerald and Ide Kearney. 2010. "The Behaviour of the

Irish Economy: Insights from the Hermes Macro-Economic Model." ESRI Working Paper, No. 287.

• Coenen, Günter; Christopher J. Erceg; Charles Freedman; Davide Furceri; Michael Kumhof; René

Lalonde; Douglas Laxton; Jesper Lindé; Annabelle Mourougane; Dirk Muir, et al. 2012. "Effects of

Fiscal Stimulus in Structural Models." American Economic Journal: Macroeconomics, 4(1), 22-68.

• European Central Bank. 2012. "December Monthly Bulletin," Monthly Bulletin. European Central

Bank